Sunday, April 30, 2017

Saturday, April 29, 2017

THE BATTLE The Cato Institute and Charles Koch vs. Murray N. Rothbard

 Murray Rothbard  and Charles Koch

The Kochtopus vs. Murray N. Rothbard, Part I

The Kochtopus vs. Murray N. Rothbard, Part II

The Kochtopus vs. Murray N. Rothbard Part III


Late Libertarian Icon Murray Rothbard on Charles Koch: He "Considers Himself Above the Law"

Murray Rothbard on the Kochtopus Part 3

by David Gordon

The influence of Charles and David Koch on the Tea Party Movement and their connections with the Governor of Wisconsin have been much in the news lately. The efforts of the Kochs to gain political influence began long ago; and students of what Sam Konkin aptly called the Kochtopus will inevitably be reminded of the Koch brothers’ involvement in Ed Clark’s campaign for President on the Libertarian Party ticket in 1980. Indeed, David Koch was Clark’s running mate; his being on the ticket freed him from the monetary limits normally imposed on donors. Differences of opinion on the campaign, among other matters, led to a breach between the Kochs and Murray Rothbard. For understanding that breach, we have an invaluable tool. Rothbard wrote about the conflict numerous times in Libertarian Forum, a newsletter that he edited from 1969 to 1984.

Rothbard’s articles, read in the order of their composition, reveal his growing sense that the Koch-dominated Cato Institute had cast aside libertarian principle. The ideological betrayal, for him, was made all the worse by the attempt of Charles Koch and Ed Crane, the President of Cato, to suppress his dissent.

Rothbard revealed the basic standpoint behind his criticism of the Koch forces before the split occurred. He praised a 1977 strategy resolution of the LP’s National Committee, saying of it: "With this statement, the LP now sets itself firmly against all forms of preferential or obligatory gradualism, against the sort of surrender of principle that says we should not cut Tax A by more than X%, or that we should not repeal statist measure B until we can repeal C." Precisely his criticism of the Clark campaign was that it embraced the gradualism Rothbard here rejected.

A first sign of impending trouble can be found in the May-June 1978 issue. This announced the formation of the Radical Caucus, with a basic set of principles that called for the LP "to avoid the quagmire of self-imposed, obligatory gradualism." Not only was Rothbard a member of the Radical Caucus’s Central Committee, so also was Bill Evers, at the time Rothbard’s principal ally in LP politics and the editor of the Cato-sponsored Inquiry magazine. There was as yet no claim that Koch, Crane, or anyone else connected with them had violated these principles; but the formation of the Radical Caucus cannot have been to Crane’s liking. He wanted to have all issues connected to LP politics under his control, and he deplored the public disclosure of dissent.

Rothbard’s quarrel with the Koch forces, though, did not first manifest itself in the Clark campaign. In the July-August 1979 issue, Rothbard called to account two influential libertarians funded by Koch: Roy Childs, the editor of Libertarian Review and Milton Mueller, the head of Students for a Libertarian Society. Both Childs and Mueller had, under the influence of Berkeley medical physicist Dr. John Gofman, called for shutting down the nuclear power industry. Why, Rothbard asked, had they abandoned the proper libertarian policy of privatizing the industry? "The answer is all too clear. It is because, in seeking allies and recruits from leftists and liberals on college campuses, SLS has found that a free market position, a stance that is neither for nor against nuclear power, is not ‘politically potent,’ as one SLS leader admitted." The same issue carried a letter signed by nineteen libertarians, including Rothbard and Evers, protesting the anti-nuclear policy.

Rothbard soon extended his charges of undue compromise. Faced with the conflict over nuclear power between Rothbard and Evers, on the one hand, and Childs and Mueller, on the other, Crane and Koch wanted to stifle the dispute. One wonders, further, whether the fact that ending nuclear power would benefit the oil industry had altogether escaped their notice. Rothbard in the November-December 1979 issue directly addressed this policy. Though he did not mention Crane by name, he unmistakably accused him of Stalinist tactics. "The temptation is to hide, blur over, and compromise on principle in order to attain: media respectability, votes, business support, support on campus, or whatever…. There are two basic ways to push one’s ideological ‘line’ within a party. One is by open airing of differences, and through persuasion and conviction, to build up a cadre of people within the party dedicated to one’s own viewpoint. The other is to operate in secret and behind closed doors, to paper over differences, and to build up a bureaucratic political machine dedicated to the achievement and perpetuation of one’s political power…. And, if the first method, that of cadre building, can be smeared as ‘Leninist,’ then the second may far more justly be termed ‘Stalinist.’" As if the reference to Crane were not clear enough, Rothbard later in his article said that only the Radical Caucus could defeat the "Crane-Koch pro-[political] professional forces."

Rothbard had by now made manifest that he thought the issues between him and the Crane-Koch forces of vital significance, but he hesitated before an outright declaration of war. Although Rothbard and his allies had not fared well at the 1979 LP Convention held at the Bonaventure Hotel in Los Angeles, he still had suggestions for Ed Clark’s presidential campaign. The gist of his advice will occasion no surprise: compromise on principles must at all costs be avoided.

Writing in the March-April 1980 issue, he argued that Clark’s strategy must be "to stick to and be proud of libertarian principle: to hold aloft and then to select the most vital issues of the campaign, and then to deliver the message with all the drama and excitement that these issues deserve." In particular, the campaign ought to stress opposition to war and to Reaganite conservatism. Instead of asking that taxes be reduced, why not propose their outright abolition? Clark should promise that, if elected, he would pardon anyone convicted of failure to pay taxes.

By the next issue, (May-June 1980), the break had become total. The Clark campaign, under Crane’s direction, espoused exactly the compromising approach that Rothbard rejected. Rothbard found especially galling that Clark supported the Childs-Mueller view of the nuclear power industry. An anti-nuclear brochure issued by the campaign had not been approved by the campaign publications review committee, of which Rothbard was a member. Proceeding in this way broke an explicit promise that publications had to be approved by the committee: "But now the Clark campaign has violated all of these solemnly pledged guidelines, in procedure and in content. The brochure glorifies Gofman, quotes his antinuclear views (with pictures yet), and then these views are seconded at length by Clark himself." Rothbard called the antinuclear power views of the pamphlet "a betrayal of libertarian and free-market principles in a transparent and cynical attempt to suck in liberals (especially in the media) and leftists (especially on the campus) to support the LP and the Clark ticket." Rothbard’s temper was not improved by Childs’s suspension of his column in Libertarian Review. Rothbard sharply responded that he did not regret this: "LR has, in recent months, become windy, flatulent, and boring."

Once Clark’s presidential campaign had concluded, Rothbard advanced a detailed and comprehensive criticism of it. In the September-December 1980 issue, he concluded: "The Clark/Koch campaign was a fourfold disaster, on the following counts: betrayal of principle; failure to educate or build cadre; fiscal irresponsibility; and lack of votes." Instead of a forthright defense of libertarianism, Clark offered a "Back to Camelot" program. "Ed Clark reiterated the theme. ‘We want to get back to the kind of government that President Kennedy had in the early 1960s.…’ And here I had thought for two decades that Kennedy was one of the Bad Guys! Live and learn!" Rothbard found the Kennedy theme "arguably the single most odious aspect of the Clark campaign." Clark, amazingly, supported only a "gradual dismantling of the draft," and called for a mere 30% tax cut. Clark’s waffling, furthermore, resulted from pressure by Crane. Clark had early in the campaign acknowledged that libertarians wish to eliminate the state. This disclosure made Crane "livid at this disclosure of truth to the media and to the public; how can they be conned into liking us if they know our real views? And because of Crane’s pressure, Clark was never allowed – or perhaps never even felt tempted – to stand up for basic libertarian principles ever again." He concluded that "Never Again" must the LP abandon principle in a futile quest for acceptability to the mainstream.

Koch and Crane had no adequate answer to Rothbard’s devastating indictment. They responded instead by attempting to remove him from the Cato Institute Board of Directors. The Board was completely under Charles Koch’s sway; if it did not do his bidding, he could call a stockholders’ meeting and replace the Board. Naturally, this state of affairs was not publicized. Koch and Crane demanded that Rothbard surrender his own shares of stock in Cato; when he refused, they illegally took them from him.

As Rothbard recounted the story in the January-April 1981 issue, Crane informed him by letter that his personal antagonism toward Crane required him to leave the Cato Board. "Crane concluded that, because of the alleged antagonism, ‘we believe it would be difficult, if not impossible, for you to objectively evaluate ongoing and future Cato projects as a Board member.’ In other words, disagreement with Crane robs one of ‘objectivity’; unfailing agreement and lickspittle fawning upon Crane is the only way to make sure that you are superbly and consistently ‘objective’." Not only was Rothbard a founding member of the Cato Board and an original stockholder: he had suggested the name "Cato" for the Institute. But none of this mattered to Crane and Koch.

Rothbard nevertheless appeared at the Cato Board meeting held on "Black Friday," March 27, 1981, in San Francisco. He argued that his disputes with Crane over LP policy should not affect his standing on the Board. "So since the Cato Institute, as a tax-exempt institution…is not supposed to have anything to do with partisan politics, how dare Crane make my stand within the LP a criterion for my continued shareholder or board membership at Cato?"

Koch and Crane, of course, rejected Rothbard’s claim. "Crane, aided and abetted by Koch, ordered me [Rothbard] to leave Cato’s regular quarterly board meeting…. The Crane/Koch action was not only iniquitous and high-handed, but also illegal, as my attorneys informed them before and during the meeting. They didn’t care. What’s more..., in order to accomplish this foul deed to their own satisfaction, Crane/Koch literally appropriated and confiscated the shares which I had naively left in Koch's Wichita office for ‘safekeeping,’ an act clearly in violation of our agreement as well as contrary to every tenet of libertarian principle."

Rothbard naturally took the opportunity to reflect on the causes of the crisis. The crisis stemmed, he thought, from two principal factors. First, Crane conducted business in a secretive, not to say paranoid fashion. His management of Cato was little short of disastrous. "It became all too clear that the dominant spirit at the Cato Institute was one of paranoia, intense hatred, back-stabbing, and endless crises. At first the crises, all revolving around relations between Crane and the other Cato executives, occurred only once every few months. But soon the frequency accelerated, until crises occurred every week, then every day or two.... What neither Crane nor his mentors seem to understand is that if you treat everyone as if they are eternally plotting against you, pretty soon by God they will start such plotting…. When I first got to Cato in 1977, I was told by a top Cato officer and Crane crony that Crane despised intellectuals and libertarian theorists and that he read practically nothing, whether books, magazines, or newspapers. At first I resisted the charge, but it turned out to be all too true."

The other factor was more fundamental; we have discussed it already but now Rothbard elaborated on it in more detail. Crane and Koch, in a quest for political power, wished to compromise with libertarian principle. This process did not begin with the Childs-Mueller view of nuclear policy. Rather, the first deviation came about when David Henderson, a supporter of the Chicago School rather than Austrian economics, received an appointment to Cato, over Rothbard’s strong opposition. "The Sarajevo of the Cato Institute was a seemingly simple act: the hiring of Dr. David Henderson as his policy analyst and economist."

Crane and Koch planned to remove Rothbard from any decision-making role and to fire his ally Bill Evers. "That, said our intrepid defector [from Cato], was the plan, and it was being carried out. Evers would eventually be kicked out, and I [Rothbard] would be quietly shifted from any decision-making role to being exploited as a resource person and general totem."

Naturally Rothbard did not go quietly but responded with continual criticism of Crane for mixing Cato business with LP politics. It was this that led to the decision to oust him. "Though my own rift with Crane began in the spring of 1979, no effort was made to oust me from the Cato Board until this spring [of 1981]. To me it is clear that the real cause of the ouster was not the Lib Forum article [criticizing the Clark campaign] but the success which I and others had at the November [1980] board meeting in beginning to call Crane to account."

After his expulsion from the Cato Board, Rothbard counterattacked. "An Open Letter to the Crane Machine" in the June-July 1981 issue urged employees of Cato to abandon Crane. "Consider for a moment: surely you must know in your heart that your Boss [Crane] has contempt for you just as he has for the entire human race…. I don’t care if your Boss is backed by a billion dollars. The libertarian movement and the Libertarian party are not a corporation or a military machine. They are not for sale…. Crane is not smart enough to even try to mask his contempt for his fellow libertarians and LP members, so people cotton to him very quickly. How can a person like that succeed in politics?"

In view of the importance of the Childs-Mueller deviation on nuclear power in causing Rothbard’s break with Cato, it was ironic that, as noted in the August 1981-January 1982 issue, both Childs and Mueller were relegated to lesser positions in the Kochtopus hierarchy. "Libertarian Review, the star movement jewel in the Koch/Crane diadem, has been killed…. Roy A. Childs, Jr., editor of LR, has been ‘warehoused’ to become a ‘foreign policy analyst’ for Crane’s Cato Institute…. Students for a Libertarian Society, the Koch/ Crane youth arm, has been cast adrift, its budget cut back from luxurious munificence to near nothing…. [F]ormer SLS youth leader Milton Mueller has been warehoused with a Kochian grant for an alleged book on something or other."

After the heat of battle had subsided, Rothbard offered in the last published issue of Libertarian Forum a retrospective analysis of the Kochtopus and its problems. Koch had established the Cato Institute to promote an ideologically consistent libertarianism. "The idea was that C.K. [Charles Koch] would (and indeed did) pour in millions in promoting institutions that would find and gather the best and the brightest of the libertarian movement, mobilized by the so-called organizing ability of Eddie Crane. The object was to promote a consistent ideology of hard-core and uncompromising radical libertarianism, of which Misesianism was the economic arm."

Looking back, Rothbard thought that the "heady excitement" of the founding of Cato led people to be blind to two problems: "(1) A monopoly of any movement lacks the essential feedback and checks and balances that competition always brings…; (2) Almost comparably to government action, throwing lots of money at a problem doesn’t always solve it. C. K. threw enormous amounts of money too fast at people (many who turned out to be turkeys) to people who scarcely deserved it."

Rothbard again drew attention to the "paradigm shift" of 1979 – the abandonment of libertarian principle. He now raised a deeper question: what accounted for this drastic change? "The key to the puzzle is not the inept, blundering Crane but the motivations of the Donor, C.K…. Charles’s goals in all this have been unique and twofold….What Charles demands above-all is absolute, unquestioning loyalty; and that is something that Crane, above all others, was equipped to give him…. Those few…who placed libertarian principle above going along with the latest twist and turn of the Kochtopusian program, have all been ruthlessly cast aside.... Control for C. K. also means the willingness of his top managers to speak to him an hour every day, to go over and clear with the Donor every aspect, no matter how minor, of the day’s decisions."

Granted Koch’s desire for control, though, how does this explain the paradigm shift? Rothbard argued that despite his immense wealth, Koch wanted the funding of libertarian groups to be undertaken by others. His initial grants were intended as seed money, and he hoped that others would take up the cause. Roy Childs persuaded Koch that abandoning principle for the paradigm shift would attract new money. "And so 1979 saw the beginning of the radical paradigm shift within the mighty Kochtopus, i.e., the accelerating abandonment of hard-core principle in order to attract outside funding."

Rothbard concluded his analysis with an account of the supplanting of Crane as Koch’s chief political agent. Richie Fink proved even more able than Crane to attract outside funding. "The path was now cleared for young Richie, and the Great Kochtopusian Revolution now occurred, during the spring and summer of 1984. The baby Finktopus, son of the Kochtopus, was born…. Fink now heads up the lobbying-activist program, luring the masses into supporting the new activism. But to get the masses you can’t be hard-core, at least so runs the Kochtopusian conventional wisdom…. Richie Fink is now in charge, not only of most scholarship... but also in charge of most Kochtopusian activism…. Crane is left in charge only of Cato." It only remains to add that Fink remains the key figure in the Kochtopus to this day.

The Kochtopus vs. Murray N. Rothbard, Part I
The Kochtopus vs. Murray N. Rothbard, Part II

The Kochtopus vs. Murray N. Rothbard, Part II

By David Gordon

After Murray Rothbard and the Cato Institute permanently parted company, in the manner described in Part I, a fundamental issue arose. Would Cato, and the other organizations in the Kochtopus, continue to promote the same ideas as they had previously done? Ostensibly, there had been no ideological split. Rothbard had objected to Cato's hiring a non-Austrian economist, David Henderson; but he left Cato after a short time. (As I recall, he threw a party to celebrate his own ouster.) Rothbard also objected to the anti-nuclear energy position of Roy Childs and some of his associates at Libertarian Review; but after Rothbard left, little was heard of this strange view. Was the separation between Cato and Rothbard, then, reducible to a dispute between Ed Crane and Rothbard over the best political strategy for the Libertarian Party?

Rothbard did not think so. Cato had been founded to promote Rothbardian ideas. Indeed, Charles Koch's support for Rothbard long antedated the founding of Cato in 1977. Koch had given money to Rothbard's Center for Libertarian Studies. Could the ideas remain the same when Rothbard had departed? He predicted that the Kochtopus would, without his guidance, depart from its original program. He joked about "Pabloism without Pablo," referring to a Trostkyist group, once headed by Michel Pablo (the pseudonym of the Greek revolutionary Michalis Raptis), which had dispensed with its founder. Time was soon to prove him right.

Rothbard deemed it of prime importance to advance Austrian economics, of which he was of course a leading exponent. Here, at any rate, the Kochtopus seemed at one with him. Walter Grinder, working from the Koch-dominated Institute for Humane Studies, promised a "Rothbardianism with manners." In his view, Rothbard had been too acerbic; through a policy of suaviter in modo, Austrian views could better gain access to the mainstream. But he did not deviate at all from Rothbardian orthodoxy in his own economic views. At the Eugene, Oregon, Cato conference in June 1979, mentioned in Part I, he gave excellent lectures on Austrian business cycle theory.

His new policy took over an idea from Friedrich Hayek's famous essay, "The Intellectuals and Socialism," though I doubt that Hayek would have endorsed the IHS application of his ideas. Hayek stressed that new social movements first gain adherents among top-ranking theorists. The majority of intellectuals, the "second-hand dealers in ideas," then popularize and simplify what they have learned from these thinkers, passing the product on to the general public. Grinder and others in leadership posts at IHS concluded that they should concentrate on elite universities such as Harvard, Yale, and Princeton in the United States, and Oxford and Cambridge in England. If students could be recruited from these universities or, if already sympathetic, admitted to their programs, success was at hand.
Grinder placed particular emphasis on Tyler Cowen, a brilliant student who had been interested in Austrian economics since his high school days. Cowen enrolled in an Austrian economics program at Rutgers, where he impressed both Joe Salerno and Richard Fink with his extraordinary erudition. When Fink moved to George Mason University, Cowen moved with him; and he completed his undergraduate degree there in 1983. Grinder considered him the next Hayek, the hope of Austrian economics.

In accord with the elite universities policy, Cowen went to Harvard for his graduate degree. There he came under the influence of Thomas Schelling and gave up his belief in Austrian economics.
After he finished his PhD in 1987, Cowen was for a time a professor at the University of California at Irvine, and he used to visit me sometimes in Los Angeles. I was impressed with his remarkable intelligence and enjoyed talking with him. But I remember how surprised I was one day when he told me that he did not regard Ludwig von Mises very highly. Here he fitted in all-too-well with another policy of Richard Fink and the Kochtopus leadership. They regarded Mises as a controversial figure: his "extremism" would interfere with the mission of arousing mainstream interest in the Austrian School. Accordingly, Hayek should be stressed and Mises downplayed. (After the collapse of the Soviet Union, which led to new interest in Mises's socialist calculation argument, this policy changed. The mainstream, though of course continuing to reject Mises, now recognized him as a great economist.) The policy was strategic, but Cowen went further — he really didn't rate Mises highly.
Cowen eventually returned to George Mason University as a Professor of Economics. He is said to be the dominant figure in the department. Because of his close friendship with Richard Fink, who left academic work to become a major executive with Koch Industries and the principal disburser of Koch Foundation funding, Cowen exerts a major influence on grants to his department.
Although he is largely favorable to the free market and believes that the Austrian school has contributed insights, Cowen remains a strong critic of Austrian and Rothbardian views. He has published a book that sharply attacks Austrian business cycle theory, Risk and Business Cycles: New and Old Austrian Perspectives (Routledge, 1997); and in an article written with Fink, "Inconsistent Equilibrium Constructs: The Evenly Rotating Economy of Mises and Rothbard" (American Economic Review, Volume 75, Number 4, September 1985), he argued that a key feature in the economic theory of Mises and Rothbard, the evenly rotating economy, is fundamentally flawed. It was ironic that the hope of Austrian economics, according to Grinder, and the prime ornament of his stress on elite universities, wrote an article for the most prestigious economic journal in the United States critical of the theory Grinder wished to propagate. Cowen has also criticized libertarian anarchism, another fundamental plank in Rothbard's thought. He has defended government funding of the space program and limited government subsidies for the arts.

One might object to what I have said so far. Although the heavy Koch support for Cowen did not advance Austrian economics, was not a flourishing Austrian program established at George Mason? If so, did not the generous fellowships offered by Koch organizations, such as the Claude Lambe Foundation, play a major role in this happy development? Fellowships were also given to those studying in the Austrian program at NYU.

There is indeed an Austrian program at George Mason, but Rothbard was proved correct. Absent his guidance, the program veered from his ideas. Many of the Austrian sympathizers at George Mason stressed the views of Ludwig Lachmann, in a way that aroused Rothbard's misgivings. These included Karen Vaughn, who became the department chair. She was very influential in the department, in part owing to her friendship with James Buchanan, a Nobel Laureate who had brought his Center for Public Choice to George Mason. She did not like Rothbard. A few years after receiving her PhD, she had attended the famous South Royalton Conference in 1974 on Austrian economics. Rothbard responded to one of her comments in what she deemed a dismissive fashion, and apparently she never forgave him. I understand that she blocked the tenure of George Selgin, an excellent economist and hardline Austrian.

Rothbard admired Lachmann's early work in capital theory but believed that his later thought carried to an extreme the valid Austrian point that the future is uncertain. Lachmann used this point, Rothbard contended, to eliminate economic theory altogether. He termed this deviation "Lachmannia."

Rothbard and the George Mason Austrians clashed over another issue. Don Lavoie, a popular teacher and an authority on the socialist calculation debate, became interested in hermeneutics, principally as developed by the German philosopher Hans-Georg Gadamer. The details of this philosophical view are singularly difficult to grasp, but fortunately it is not necessary for our purposes to explain it. Suffice it to say that Lavoie thought that Gadamer's philosophy would lend support to the Austrian criticism of the scientistic procedures of neoclassical economics.

Rothbard emphatically disagreed. He denounced Gadamer's philosophy as anti-theoretical. No doubt Gadamer opposed scientism; but, Rothbard claimed, he advanced in its place a relativistic historicism that subverted Mises's praxeology. (In this battle I played a minor role on Rothbard's side.) After a few years, interest in hermeneutics subsided. Lavoie fell out of favor with Fink — according to one account, he refused to support the appointment of someone Fink wanted on the faculty — and as a result of the discord this caused, he transferred to another department, the Program on Social and Organizational Learning. He died at the early age of fifty in 2001.

Grinder did not support the interest in hermeneutics displayed by some of the younger Austrians to whom he had served as a mentor. He too aroused Fink's displeasure, and he lost his influential position.

The current Austrian program at George Mason, headed by Peter Boettke, stresses a combination of Austrian theory with other approaches, especially game theory, public choice, and institutional economics. Since Rothbard was critical of all of these movements, it is safe to say he would not have completely approved of this program.

The activities of the IHS under Walter Grinder and his successors have by no means been confined to support for economics students. Quite the contrary, fellowships and other support have been made available to those in a number of other disciplines. Again, the pseudo-Hayekian policy discussed previously has had results out of keeping with the promotion of classical liberalism, let alone a strict Rothbardian program.

Stephen Macedo perfectly fit that policy. He did graduate work at Princeton, Oxford, and the London School of Economics. It is hardly surprising, then, that he received extensive funding. He now serves as Laurance S. Rockefeller Professor of Politics and Director of the Center for Human Values at Princeton University.

One might at first think that Macedo's career is a triumph for the elite universities policy. A student who attended some of these schools is now a professor at one of them: what could be better? There is unfortunately one small catch. Macedo does not support classical liberalism. Quite the contrary, in his major work Liberal Virtues (Oxford University Press, 1990), he defends compulsory indoctrination in politically correct values in a way entirely alien to libertarianism. Values he deems to be liberal, such as diversity, must shape the private lives of citizens, as well as their public activities. The principal result of the Koch funding he received was a pamphlet published in 1987 by Cato, The New Right versus the Constitution, an attack on strict construction of the Constitution. John Gray, an Oxford don who later taught at the London School of Economics, was another IHS favorite who abandoned classical liberalism. Gray has made a career of moving from one ideology to another, often at six-month intervals. His current views call to mind a phrase of the "Gloomy Dean," William Ralph Inge: "a rather soppy socialism."

The oddities of IHS were not confined to its funding policy. Roderick Long, a leading libertarian philosopher who for a time worked at IHS, has noted that Charles Koch, who, appropriately enough, wanted results for the money he spent, had a peculiar way of measuring them. After Walter Grinder's departure, Koch decided to emphasize policy studies over academic work. The size of student seminars increased, and students were given questionnaires at the beginning and end of a week's program to determine the extent of their political progress. Applications for IHS scholarships were run through a computer to determine how many times the "right" names, e.g., Mises, Hayek, and Bastiat, appeared.

Incidentally, despite his immense wealth, Koch was often ungenerous in his subventions. In her last years, the centenarian Margit von Mises was in failing health, and it was suggested that she move to a rest home. Koch was approached for a contribution, and he responded that he would pay half the cost, if the remainder were raised through a public subscription. Paying for the full cost would have been for him the equivalent of an ordinary person's spending a cent or two, but evidently this was asking too much of him. Much better, apparently, to turn the whole matter into a public spectacle. In any event, nothing came of the proposal.

Let us return to the Cato Institute, the main part of the Kochtopus with which Rothbard was associated. Rothbard's prediction that Cato would depart from his views has been eminently fulfilled. He is mentioned in the Cato Home Study Course, but his thought is little more than a sideline. When, in Part I, I claimed that people at Cato often refer to him with hostility and contempt, a former employee wrote to correct me. Rothbard is hardly mentioned at all, he said; and I think he is very largely right. I have been able to turn up only one strongly critical assessment by a leading figure at Cato. This writer, among other things, dismissed Rothbard's writings on money as those of a crank. (Friedrich Hayek once told me how much he admired the account of the business cycle in Rothbard's America's Great Depression, an account that rests on Rothbard's understanding of monetary theory; and the Nobel laureate Maurice Allais has also praised the book. But what do they know?) For the rest, he is ignored.

Austrian economics, once the mainstay of Cato, is now at best a tolerated minority position. The 24th Annual Monetary Conference of Cato, held in 2006, on the theme "Federal Reserve Policy in the Face of Crises," featured only one Austrian speaker, Larry White. Establishment worthies such as Robert Barro and Anna Schwartz, among many others, dominated the proceedings. The keynote address was, however, delivered by a onetime recipient of Koch funding to study Austrian economics, Randall Kroszner. Far from defending Austrian economics, though, he spoke in his capacity as a member of the Board of Governors of the Federal Reserve System. Kroszner, who attended Brown as an undergraduate and Harvard as a graduate student, has been another "triumph" of the elite universities policy. Like Cowen, he was a favorite of Grinder and IHS and received extensive funding, but he no longer manifests any interest in Austrian economics.

The 25th Annual Conference included a few more Austrians, on the panel "Remembering Milton Friedman"; this time Fed Chairman Ben Bernanke delivered the keynote address. Ron Paul, despite his expert knowledge of monetary issues and his fame as the leading Congressional spokesman for a free society, has never in twenty-five years been invited to these conferences. He was the subject of Koch and Fink's displeasure when he refused to convert to a pro-central-banking position.
In foreign policy, Cato no longer adheres strictly to Rothbard's resolute non-interventionist views. In an article that appeared in The Wall Street Journal, January 28, 2008, Roger Pilon, who holds the B. Kenneth Simon Chair in Constitutional Studies at Cato, opposed Congressional efforts to enact mild restraints on President Bush's warrantless wiretapping. Such attempts to "micromanage" the president, he averred, were unconstitutional and threatened America's security. Others at Cato differed with him, but his grossly anti-libertarian stance was a permissible option for a principal Cato figure. Brink Lindsey, Vice President for Research, is another Cato official who supports the Iraq war.
As mentioned in Part I, the Kochtopus strongly opposes the Mises Institute, which aims to continue the Rothbardian policy of Austrian economics, laissez-faire, and peace that Cato was established to promote. The opposition continues to the present day. Reason, now under Koch patronage, did not react to Ron Paul's The Revolution: A Manifesto with the praise one would expect for this best-selling libertarian book. David Weigel, in a post of April 30, 2008 on the Reason website, took the occasion to attack Lew Rockwell and other so-called "paleos." The Kochtopus cannot forgive those who continue to champion Murray Rothbard.

See part 3.
May 12, 2008
David Gordon is a senior fellow at the Ludwig von Mises Institute and editor of its Mises Review. 

Friday, April 28, 2017

Ten Great Economic Myths

By Murray Rothbard

Our country is beset by a large number of economic myths that distort public thinking on important problems and lead us to accept unsound and dangerous government policies. Here are ten of the most dangerous of these myths and an analysis of what is wrong with them.

Myth #1
Deficits are the cause of inflation; deficits have nothing to do with inflation.
In recent decades we always have had federal deficits. The invariable response of the party out of power, whichever it may be, is to denounce those deficits as being the cause of our chronic inflation. And the invariable response of whatever party is in power has been to claim that deficits have nothing to do with inflation. Both opposing statements are myths.
Deficits mean that the federal government is spending more than it is taking in in taxes. Those deficits can be financed in two ways. If they are financed by selling Treasury bonds to the public, then the deficits are not inflationary. No new money is created; people and institutions simply draw down their bank deposits to pay for the bonds, and the Treasury spends that money. Money has simply been transferred from the public to the Treasury, and then the money is spent on other members of the public.
On the other hand, the deficit may be financed by selling bonds to the banking system. If that occurs, the banks create new money by creating new bank deposits and using them to buy the bonds. The new money, in the form of bank deposits, is then spent by the Treasury, and thereby enters permanently into the spending stream of the economy, raising prices and causing inflation. By a complex process, the Federal Reserve enables the banks to create the new money by generating bank reserves of one-tenth that amount. Thus, if banks are to buy $100 billion of new bonds to finance the deficit, the Fed buys approximately $10 billion of old treasury bonds. This purchase increases bank reserves by $10 billion, allowing the banks to pyramid the creation of new bank deposits or money by ten times that amount. In short, the government and the banking system it controls in effect "print" new money to pay for the federal deficit.
Thus, deficits are inflationary to the extent that they are financed by the banking system; they are not inflationary to the extent they are underwritten by the public.
Some policymakers point to the 1982–83 period, when deficits were accelerating and inflation was abating, as a statistical "proof" that deficits and inflation have no relation to each other. This is no proof at all. General price changes are determined by two factors: the supply of, and the demand for, money. During 1982–83 the Fed created new money at a very high rate, approximately at 15 percent per annum. Much of this went to finance the expanding deficit. But on the other hand, the severe depression of those two years increased the demand for money (i.e. lowered the desire to spend money on goods), in response to the severe business losses. This temporarily compensating increase in the demand for money does not make deficits any the less inflationary. In fact, as recovery proceeds, spending will pick up and the demand for money will fall, and the spending of the new money will accelerate inflation.

Myth #2
Deficits do not have a crowding-out effect on private investment.
In recent years there has been an understandable worry over the low rate of saving and investment in the United States. One worry is that the enormous federal deficits will divert savings to unproductive government spending and thereby crowd out productive investment, generating ever, greater long-run problems in advancing or even maintaining the living standards of the public.
Some policymakers have once again attempted to rebut this charge by statistics. In 1982–83, they declare, deficits were high and increasing, while interest rates fell, thereby indicating that deficits have no crowding,out effect.
This argument once again shows the fallacy of trying to refute logic with statistics. Interest rates fell because of the drop of business borrowing in a recession. "Real" interest rates (interest rates minus the inflation rate) stayed unprecedentedly high, however — partly because most of us expect renewed heavy inflation, partly because of the crowding,out effect. In any case, statistics cannot refute logic; and logic tells us that if savings go into government bonds, there will necessarily be less savings available for productive investment than there would have been, and interest rates will be higher than they would have been without the deficits. If deficits are financed by the public, then this diversion of savings into government projects is direct and palpable. If the deficits are financed by bank inflation, then the diversion is indirect, the crowding-out now taking place by the new money "printed" by the government competing for resources with old money saved by the public.
Milton Friedman tries to rebut the crowding-out effect of deficits by claiming that all government spending, not just deficits, equally crowds out private savings and investment. It is true that money siphoned off by taxes could also have gone into private savings and investment. But deficits have a far greater crowding,out effect than overall spending, since deficits financed by the public obviously tap savings and savings alone, whereas taxes reduce the public's consumption as well as savings.
Thus, deficits, whichever way you look at them, cause. grave economic problems. If they are financed by the banking system, they are inflationary. But even if they are financed by the public, they will still cause severe crowding-out effects, diverting much-needed savings from productive private investment to wasteful government projects. And, furthermore, the greater the deficits the greater the permanent income tax burden on the American people to pay for the mounting interest payments, a problem aggravated by the high interest rates brought about by inflationary deficits.

Myth #3
Tax increases are a cure for deficits.
Those people who are properly worried about the deficit unfortunately offer an unacceptable solution: increasing taxes. Curing deficits by raising taxes is equivalent to curing someone's bronchitis by shooting him. The "cure" is far worse than the disease.
For one reason, as many critics have pointed out, raising taxes simply gives the government more money, and so the politicians and bureaucrats are likely to react by raising expenditures still further. Parkinson said it all in his famous "Law": "Expenditures rise to meet income:' If the government is willing to have, say, a 20 percent deficit, it will handle high revenues by raising spending still more to maintain the same proportion of deficit.
But even apart from this shrewd judgment in political psychology, why should anyone believe that a tax is better than a higher price? It is true that inflation is a form of taxation, in which the government and other early receivers of new money are able to expropriate the members of the public whose income rises later in the process of inflation. But, at least' with inflation, people are still reaping some of the benefits of exchange. If bread rises to $10 a loaf, this is unfortunate, but at least you can still eat the bread. But if taxes go up, your money is expropriated for the benefit of politicians and bureaucrats, and you are left with no service or benefit. The only result is that the producers' money is confiscated for the benefit of a bureaucracy that adds insult to injury by using part of that confiscated money to push the public around.
No, the only sound cure for deficits is a simple but virtually unmentioned one: cut the federal budget. How and where? Anywhere and everywhere.

Myth #4
Every time the Fed tightens the money supply, interest rates rise (or fall); every time the Fed expands the money supply, interest rates rise (or fall).
The financial press now knows enough economics to watch weekly money supply figures like hawks; but they inevitably interpret these figures in a chaotic fashion. If the money supply rises, this is interpreted as lowering interest rates and inflationary; it is also interpreted, often in the very same article, as raising interest rates. And vice versa. If the Fed tightens the growth of money, it is interpreted as both raising interest rates and lowering them. Sometimes it seems that all Fed actions, no matter how contradictory, must result in raising interest rates. Clearly something is very wrong here.
The problem here is that, as in the case of price levels, there are several causal factors operating on interest rates and in different directions. If the Fed expands the money supply, it does so by generating more bank reserves and thereby expanding the supply of bank credit and bank deposits. The expansion of credit necessarily means an increased supply in the credit market and hence a lowering of the price of credit, or the rate of interest. On the other : hand, if the Fed restricts the supply of credit and the growth of the money supply, this means that the supply in the credit market declines, and this should mean a rise in interest rates.
And this is precisely what happens in the first decade or two of chronic inflation. Fed expansion lowers interest rates; Fed tightening raises them. But after this period, the public and the market begin to catch on to what is happening. They begin to realize that inflation is chronic because of the systemic expansion of the money supply. When they realize this fact of life, they will also realize that inflation wipes out the creditor for the benefit of the debtor. Thus, if someone grants a loan at 5% for one year, and there is 7% inflation for that year, the creditor loses, not gains. He loses 2%, since he gets paid back in dollars that are now worth 7% less in purchasing power. Correspondingly, the debtor gains by inflation. As creditors begin to catch on, they place an inflation premium on the interest rate, and debtors will be willing to pay. Hence, in the long-run anything which fuels the expectations of inflation will raise inflation premiums on interest rates; and anything which dampens those expectations will lower those premiums. Therefore, a Fed tightening will now tend to dampen inflationary expectations and lower interest rates; a Fed expansion will whip up those expectations again and raise them. There are two, opposite causal chains at work. And so Fed expansion or contraction can either raise or lower interest rates, depending on which causal chain is stronger.
Which will be stronger? There is no way to know for sure. In the early decades of inflation, there is no inflation premium; in the later decades, such as we are now in, there is. The relative strength and reaction times depend on the subjective expectations of the public, and these cannot be forecast with certainty. And this is one reason why economic forecasts can never be made with certainty.

Myth #5
Economists, using charts or high speed computer models, can accurately forecast the future.
The problem of forecasting interest rates illustrates the pitfalls of forecasting in general. People are contrary cusses whose behavior, thank goodness, cannot be forecast precisely in advance. Their values, ideas, expectations, and knowledge change all the time, and change in an unpredictable manner. What economist, for example, could have forecast (or did forecast) the Cabbage Patch Kid craze of the Christmas season of 1983? Every economic quantity, every price, purchase, or income figure is the embodiment of thousands, even millions, of unpredictable choices by individuals.
Many studies, formal and informal, have been made of the record of forecasting by economists, and it has been consistently abysmal. Forecasters often complain that they can do well enough as long as current trends continue; what they have difficulty in doing is catching changes in trend. But of course there is no trick in extrapolating current trends into the near future. You don't need sophisticated computer models for that; you can do it better and far more cheaply by using a ruler. The real trick is precisely to forecast when and how trends will change, and forecasters have been notoriously bad at that. No economist forecast the depth of the 1981–82 depression, and none predicted the strength of the 1983 boom.
The next time you are swayed by the jargon or seeming expertise of the economic forecaster, ask yourself this question: If he can really predict the future so well, why is he wasting his time putting out newsletters or doing consulting when he himself could be making trillions of dollars in the stock and commodity markets?

Myth #6
There is a tradeoff between unemployment and inflation.
Every time someone calls for the government to abandon its inflationary policies, Establishment economists and politicians warn that the result can only be severe unemployment. We are trapped, therefore, into playing off inflation against high unemployment, and become persuaded that we must therefore accept some of both.
This doctrine is the fallback position for Keynesians. Originally, the Keynesians promised us that by manipulating and fine-tuning deficits and government spending, they could and would bring us permanent prosperity and full employment without inflation. Then, when inflation became chronic and ever-greater, they changed their tune to warn of the alleged tradeoff, so as to weaken any possible pressure upon the government to stop its inflationary creation of new money.
The tradeoff doctrine is based on the alleged "Phillips curve," a curve invented many years ago by the British economist A. W. Phillips. Phillips correlated wage rate increases with unemployment, and claimed that the two move inversely: the higher the increases in wage rates, the lower the unemployment. On its face, this is a peculiar doctrine, since it flies in the face of logical, commonsense theory. Theory tells us that the higher the wage rates, the greater the unemployment, and vice versa. If everyone went to their employer tomorrow and insisted on double or triple the wage rate, many of us would be promptly out of a job. Yet this bizarre finding was accepted as gospel by the Keynesian economic establishment.
By now, it should be clear that this statistical finding violates the facts as well as logical theory. For during the 1950s, inflation was only about one to two percent per year, and unemployment hovered around three or four percent, whereas nowadays unemployment ranges between eight and 11 percent, and inflation between five and 13 percent. In the last two or three decades, in short, both inflation and unemployment have increased sharply and severely. If anything, we have had a reverse Phillips curve. There has been anything but an inflation-unemployment tradeoff.
But ideologues seldom give way to the facts, even as they continually claim to "test" their theories by facts. To save the concept, they have simply concluded that the Phillips curve still remains as an inflation-unemployment tradeoff, except that the curve has unaccountably "shifted" to a new set of alleged tradeoffs. On this sort of mind-set, of course, no one could ever refute any theory.
In fact, inflation now, even if it reduces unemployment in the short-run by inducing prices to spurt ahead of wage rates (thereby reducing real wage rates), will only create more unemployment in the long run. Eventually, wage rates catch up with inflation, and inflation brings recession and unemployment inevitably in its wake. After more than two decades of inflation, we are all now living in that "long run."

Myth #7
Deflation — falling prices — is unthinkable, and would cause a catastrophic depression.
The public memory is short. We forget that, from the beginning of the Industrial Revolution in the mid-18th century until the beginning of World War II, prices generally went down, year after year. That's because continually increasing productivity and output of goods generated by free markets caused prices to fall. There was no depression, however, because costs fell along with selling prices. Usually, wage rates remained constant while the cost of living fell, so that "real" wages, or everyone's standard of living, rose steadily.
Virtually the only time when prices rose over those two centuries were periods of war (War of 1812, Civil War, World War I), when the warring governments inflated the money supply so heavily to pay for the war as to more than offset continuing gains in productivity.
We can see how free market capitalism, unburdened by governmental or central bank inflation, works if we look at what has happened in the last few years to the prices of computers. A computer used to have to be enormous, costing millions of dollars. Now, in a remarkable surge of productivity brought about by the microchip revolution, computers are falling in price even as I write. Computer firms are successful despite the falling prices because their costs have been falling, and productivity rising. In fact, these falling costs and prices have enabled them to tap a mass market characteristic of the dynamic growth of free market capitalism. "Deflation" has brought no disaster to this industry.
The same is true of other high-growth industries, such as electronic calculators, plastics, TV sets, and VCRs. Deflation, far from bringing catastrophe, is the hallmark of sound and dynamic economic growth.

Myth #8
The best tax is a "flat" income tax, proportionate to income across the board, with no exemptions or deductions.
It is usually added by flat-tax proponents, that eliminating such exemptions would enable the federal government to cut the current tax rate substantially.
But this view assumes, for one thing, that present deductions from the income tax are immoral subsidies or "loopholes" that should be closed for the benefit of all. A deduction or exemption is only a "loophole" if you assume that the government owns 100 percent of everyone's income and that allowing some of that income to remain untaxed constitutes an irritating "loophole." Allowing someone to keep some of his own income is neither a loophole nor a subsidy. Lowering the overall tax by abolishing deductions for medical care, for interest payments, or for uninsured losses, is simply lowering the taxes of one set of people (those that have little interest to pay, or medical expenses, or uninsured losses) at the expense of raising them for those who have incurred such expenses.
There is furthermore neither any guarantee nor even likelihood that, once the exemptions and deductions are safely out of the way, the government would keep its tax rate at the lower level. Looking at the record of governments, past and present, there is every reason to assume that more of our money would be taken by the government as it raised the tax rate back up (at least) to the old level, with a consequently greater overall drain from the producers to the bureaucracy.
It is supposed that the tax system should be roughly that of pricing or incomes on the market. But market pricing is not. proportional to incomes. It would be a peculiar world, for example, if Rockefeller were forced to pay $1,000 for a loaf of bread — that is, a payment proportionate to his income relative to the average man. That would mean a world in which equality of incomes was enforced in a particularly bizarre and inefficient manner. If a tax were levied like a market price, it would be equal to every "customer," not proportionate to each customer's income.

Myth #9
An income tax cut helps everyone because not only the taxpayer but also the government will benefit, since tax revenues will rise when the rate is cut.
This is the so-called "Laffer curve; set forth by California economist Arthur Laffer. It was advanced as a means of allowing politicians to square the circle; to come out for tax cuts, keeping spending at the current level, and balance the budget all at the same time. In that way, the public would enjoy their tax cuts, be happy at the balanced budget, and still receive the same level of subsidies from the government.
It is true that if tax rates are 99 percent, and they are cut to 95 percent, tax revenue will go up. But there is no reason to assume such simple connections at any other time. In fact, this relationship works much better for a local excise tax than for a national income tax. A few years ago, the government of the District of Columbia decided to procure some revenue by sharply raising the District's gasoline tax. But, then, drivers could simply nip over the border to Virginia or Maryland and fill up at a much cheaper price. D.C. gasoline tax revenues fell, and much to their chagrin and confusion, they had to repeal the tax.
But this is not likely to happen with the income tax. People are not going to stop working or leave the country because of a relatively small tax hike, or do the reverse because of a tax cut.
There are some problems with the Laffer curve. The amount of time it is supposed to take for the Laffer effect to work is never specified. But still more important: Laffer assumes that what all of us want is to maximize tax revenue to the government. If — a big if — we are really at the upper half of the Laffer Curve, we should then all want to set tax rates at that "optimum" point. But why? Why should it be the objective of every one of us to maximize government revenue? To push to the maximum, in short, the share of private product that gets siphoned off to the activities of government? I should think we would be more interested in minimizing government revenue by pushing tax rates far, far below whatever the Laffer Optimum might happen to be.

Myth #10
Imports from countries where labor is cheap cause unemployment in the United States.
One of the many problems with this doctrine is that it ignores the question: why are wages low in a foreign country and high in the United States? It starts with these wage rates as ultimate givens, and doesn't pursue the question why they are what they are. Basically, they are high in the United States because labor productivity is high — because workers here are aided by large amounts of technologically advanced capital equipment. Wage rates are low in many foreign countries because capital equipment is small and technologically primitive. Unaided by much capital, worker productivity is far lower than in the U.S. Wage rates in every country are determined by the productivity of the workers in that country. Hence, high wages in the United States are not a standing threat to American prosperity; they are the result of that prosperity.
But what of certain industries in the U.S. that complain loudly and chronically about the "unfair" competition of products from low-wage countries? Here, we must realize that wages in each country are interconnected from one industry and occupation and region to another. All workers compete with each other, and if wages in industry A are far lower than in other industries, workers — spearheaded by young workers starting their careers — would leave or refuse to enter industry A and move to other firms or industries where the wage rate is higher.
Wages in the complaining industries, then, are high because they have been bid high by all industries in the United States. If the steel or textile industries in the United States find it difficult to compete with their counterparts abroad, it is not because foreign firms are paying low wages, but because other American industries have bid up American wage rates to such a high level that steel and textile cannot afford to pay. In short, what's really happening is that steel, textile, and other such firms are using labor inefficiently as compared to other American industries. Tariffs or import quotas to keep inefficient firms or industries in operation hurt everyone, in every country, who is not in that industry. They injure all American consumers by keeping up prices, keeping down quality and competition, and distorting production. A tariff or an import quota is equivalent to chopping up a railroad or destroying an airline — for its point is to make international transportation artificially expensive.
Tariffs and import quotas also injure other, efficient American industries by tying up resources that would otherwise move to more efficient uses. And, in the long run, the tariffs and quotas, like any sort of monopoly privilege conferred by government, are no bonanza even for the firms being protected and subsidized. For, as we have seen in the cases of railroads and airlines, industries enjoying government monopoly (whether through tariffs or regulation) eventually become so inefficient that they lose money anyway, and can only call for more and more bailouts, for even more of a privileged shelter from free competition.

The above originally appeared at

Smashing Protectionist "Theory" (Again)

By Murray Rothbard

Protectionism, often refuted and seemingly abandoned, has returned, and with a vengeance. The Japanese, who bounced back from grievous losses in World War II to astound the world by producing innovative, high-quality products at low prices, are serving as the convenient butt of protectionist propaganda. Memories of wartime myths prove a heady brew, as protectionists warn about this new "Japanese imperialism," even "worse than Pearl Harbor."
This "imperialism" turns out to consist of selling Americans wonderful TV sets, autos, microchips, etc., at prices more than competitive with American firms.
Is this "flood" of Japanese products really a menace, to be combated by the US government? Or is the new Japan a godsend to American consumers?
In taking our stand on this issue, we should recognize that all government action means coercion, so that calling upon the US government to intervene means urging it to use force and violence to restrain peaceful trade. One trusts that the protectionists are not willing to pursue their logic of force to the ultimate in the form of another Hiroshima and Nagasaki.

Keep Your Eye on the Consumer

As we unravel the tangled web of protectionist argument, we should keep our eye on two essential points:
  1. protectionism means force in restraint of trade; and
  2. the key is what happens to the consumer.
Invariably, we will find that the protectionists are out to cripple, exploit, and impose severe losses not only on foreign consumers but especially on Americans. And since each and every one of us is a consumer, this means that protectionism is out to mulct all of us for the benefit of a specially privileged, subsidized few — and an inefficient few at that: people who cannot make it in a free and unhampered market.
Take, for example, the alleged Japanese menace. All trade is mutually beneficial to both parties — in this case Japanese producers and American consumers — otherwise they would not engage in the exchange. In trying to stop this trade, protectionists are trying to stop American consumers from enjoying high living standards by buying cheap and high-quality Japanese products. Instead, we are to be forced by government to return to the inefficient, higher-priced products we have already rejected. In short, inefficient producers are trying to deprive all of us of products we desire so that we will have to turn to inefficient firms. American consumers are to be plundered.

How to Look at Tariffs and Quotas

The best way to look at tariffs or import quotas or other protectionist restraints is to forget about political boundaries. Political boundaries of nations may be important for other reasons, but they have no economic meaning whatever. Suppose, for example, that each of the United States were a separate nation. Then we would hear a lot of protectionist bellyaching that we are now fortunately spared. Think of the howls by high-priced New York or Rhode Island textile manufacturers who would then be complaining about the "unfair," "cheap labor" competition from various low-type "foreigners" from Tennessee or North Carolina, or vice versa.
"The best way to look at tariffs or import quotas or other protectionist restraints is to forget about political boundaries. Political boundaries of nations may be important for other reasons, but they have no economic meaning whatever."
Fortunately, the absurdity of worrying about the balance of payments is made evident by focusing on interstate trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.
If we think about it, it is clear that a call by New York firms for a tariff against North Carolina is a pure rip-off of New York (as well as North Carolina) consumers, a naked grab for coerced special privilege by less-efficient business firms. If the 50 states were separate nations, the protectionists would then be able to use the trappings of patriotism, and distrust of foreigners, to camouflage and get away with their looting the consumers of their own region.
Fortunately, interstate tariffs are unconstitutional. But even with this clear barrier, and even without being able to wrap themselves in the cloak of nationalism, protectionists have been able to impose interstate tariffs in another guise. Part of the drive for continuing increases in the federal minimum-wage law is to impose a protectionist devise against lower-wage, lower-labor-cost competition from North Carolina and other southern states against their New England and New York competitors.
During the 1966 congressional battle over a higher federal minimum wage, for example, the late Senator Jacob Javits (R-NY) freely admitted that one of his main reasons for supporting the bill was to cripple the southern competitors of New York textile firms. Since southern wages are generally lower than in the north, the business firms hardest hit by an increased minimum wage (and the workers struck by unemployment) will be located in the south.
Another way in which interstate trade restrictions have been imposed has been in the fashionable name of "safety." Government-organized state milk cartels in New York, for example, have prevented importation of milk from nearby New Jersey under the patently spurious grounds that the trip across the Hudson would render New Jersey milk "unsafe."
If tariffs and restraints on trade are good for a country, then why not indeed for a state or region? The principle is precisely the same. In America's first great depression, the Panic of 1819, Detroit was a tiny frontier town of only a few hundred people. Yet protectionist cries arose — fortunately not fulfilled — to prohibit all "imports" from outside of Detroit, and citizens were exhorted to buy only Detroit. If this nonsense had been put into effect, general starvation and death would have ended all other economic problems for Detroiters.
So why not restrict and even prohibit trade, i.e., "imports," into a city, or a neighborhood, or even on a block, or, to boil it down to its logical conclusion, to one family? Why shouldn't the Jones family issue a decree that from now on, no member of the family can buy any goods or services produced outside the family house? Starvation would quickly wipe out this ludicrous drive for self-sufficiency.
And yet we must realize that this absurdity is inherent in the logic of protectionism. Standard protectionism is just as preposterous, but the rhetoric of nationalism and national boundaries has been able to obscure this vital fact.
The upshot is that protectionism is not only nonsense, but dangerous nonsense, destructive of all economic prosperity. We are not, if we were ever, a world of self-sufficient farmers. The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade — such as protectionism — cripple, hobble, and destroy trade, the source of life and prosperity. Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of less-efficient producers, at the expense of more competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.

The Negative Railroad

Protectionism is also peculiarly destructive because it acts as a coerced and artificial increase in the cost of transportation between regions. One of the great features of the Industrial Revolution, one of the ways in which it brought prosperity to the starving masses, was by reducing drastically the cost of transportation. The development of railroads in the early 19th century, for example, meant that for the first time in the history of the human race, goods could be transported cheaply over land. Before that, water — rivers and oceans — was the only economically viable means of transport. By making land transport accessible and cheap, railroads allowed interregional land transportation to break up expensive inefficient local monopolies. The result was an enormous improvement in living standards for all consumers. And what the protectionists want to do is lay an axe to this wondrous principle of progress.
It is no wonder that Frederic Bastiat, the great French laissez-faire economist of the mid-19th century, called a tariff a "negative railroad." Protectionists are just as economically destructive as if they were physically chopping up railroads, or planes, or ships, and forcing us to revert to the costly transport of the past — mountain trails, rafts, or sailing ships.

"Fair" Trade

Let us now turn to some of the leading protectionist arguments. Take, for example, the standard complaint that while the protectionist "welcomes competition," this competition must be "fair." Whenever someone starts talking about "fair competition" or indeed, about "fairness" in general, it is time to keep a sharp eye on your wallet, for it is about to be picked. For the genuinely "fair" is simply the voluntary terms of exchange, mutually agreed upon by buyer and seller. As most of the medieval Scholastics were able to figure out, there is no "just" (or "fair") price outside of the market price.
So what could be "unfair" about the free-market price? One common protectionist charge is that it is "unfair" for an American firm to compete with, say, a Taiwanese firm which needs to pay only one-half the wages of the American competitor. The US government is called upon to step in and "equalize" the wage rates by imposing an equivalent tariff upon the Taiwanese. But does this mean that consumers can never patronize low-cost firms because it is "unfair" for them to have lower costs than inefficient competitors? This is the same argument that would be used by a New York firm trying to cripple its North Carolina competitor.
What the protectionists don't bother to explain is why US wage rates are so much higher than Taiwan. They are not imposed by Providence. Wage rates are high in the United States because American employers have bid these rates up. Like all other prices on the market, wage rates are determined by supply and demand, and the increased demand by US employers has bid wages up. What determines this demand? The "marginal productivity" of labor.
The demand for any factor of production, including labor, is constituted by the productivity of that factor, the amount of revenue that the worker, or the pound of cement or acre of land, is expected to bring to the brim. The more productive the factory, the greater the demand by employers, and the higher its price or wage rate. American labor is more costly than Taiwanese because it is far more productive. What makes it productive? To some extent, the comparative qualities of labor, skill, and education. But most of the difference is not due to the personal qualities of the laborers themselves, but to the fact that the American laborer, on the whole, is equipped with more and better capital equipment than his Taiwanese counterparts. The more and better the capital investment per worker, the greater the worker's productivity, and therefore the higher the wage rate.
In short, if the American wage rate is twice that of the Taiwanese, it is because the American laborer is more heavily capitalized, is equipped with more and better tools, and is therefore, on the average, twice as productive. In a sense, I suppose, it is not "fair" for the American worker to make more than the Taiwanese, not because of his personal qualities, but because savers and investors have supplied him with more tools. But a wage rate is determined not just by personal quality but also by relative scarcity, and in the United States the worker is far scarcer compared to capital than he is in Taiwan.
Putting it another way, the fact that American wage rates are on the average twice that of the Taiwanese, does not make the cost of labor in the United States twice that of Taiwan. Because US labor is twice as productive, this means that the double wage rate in the United States is offset by the double productivity, so that the cost of labor per unit product in the United States and Taiwan tends, on the average, to be the same. One of the major protectionist fallacies is to confuse the price of labor (wage rates) with its cost, which also depends on its relative productivity.
"Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of less-efficient producers, at the expense of more competent firms and of consumers."
Thus, the problem faced by American employers is not really with the "cheap labor" in Taiwan, because "expensive labor" in the United States is precisely the result of the bidding for scarce labor by US employers. The problem faced by less efficient US textile or auto firms is not so much cheap labor in Taiwan or Japan but the fact that other US industries are efficient enough to afford it, because they bid wages that high in the first place.
So, by imposing protective tariffs and quotas to save, bail out, and keep in place less efficient US textile or auto or microchip firms, the protectionists are not only injuring the American consumer. They are also harming efficient US firms and industries, which are prevented from employing resources now locked into incompetent firms, and who could otherwise be able to expand and sell their efficient products at home and abroad.


Another contradictory line of protectionist assault on the free market asserts that the problem is not so much the low costs enjoyed by foreign firms, as the "unfairness" of selling their products "below costs" to American consumers, and thereby engaging in the pernicious and sinful practice of "dumping." By such dumping they are able to exert unfair advantage over American firms who presumably never engage in such practices and make sure that their prices are always high enough to cover costs. But if selling below costs is such a powerful weapon, why isn't it ever pursued by business firms within a country?
"As far as consumers are concerned, the more 'dumping' that takes place, the better."
Our first response to this charge is, once again, to keep our eye on consumers in general and on American consumers in particular. Why should it be a matter of complaint when consumers so clearly benefit? Suppose, for example, that Sony is willing to injure American competitors by selling TV sets to Americans for a penny apiece. Shouldn't we rejoice at such an absurd policy of suffering severe losses by subsidizing us, the American consumers? And shouldn't our response be, "Come on, Sony, subsidize us some more!" As far as consumers are concerned, the more "dumping" that takes place, the better.
But what of the poor American TV firms, whose sales will suffer so long as Sony is willing to virtually give their sets away? Well, surely, the sensible policy for RCA, Zenith, etc. would be to hold back production and sales until Sony drives itself into bankruptcy. But suppose that the worst happens, and RCA, Zenith, etc. are themselves driven into bankruptcy by the Sony price war? Well, in that case, we the consumers will still be better off, since the plants of the bankrupt firms, which would still be in existence, would be picked up for a song at auction, and the American buyers at auction would be able to enter the TV business and outcompete Sony because they now enjoy far lower capital costs.
For decades, indeed, opponents of the free market have claimed that many businesses gained their powerful status on the market by what is called "predatory price cutting," that is, by driving their smaller competitors into bankruptcy by selling their goods below cost, and then reaping the reward of their unfair methods by raising their prices and thereby charging "monopoly prices" to the consumers. The claim is that while consumers may gain in the short run by price wars, "dumping," and selling below costs, they lose in the long run from the alleged monopoly. But, as we have seen, economic theory shows that this would be a mug's game, losing money for the "dumping" firms, and never really achieving a monopoly price. And sure enough, historical investigation has not turned up a single case where predatory pricing, when tried, was successful, and there are actually very few cases where it has even been tried.
"Whenever someone starts talking about 'fair competition' or indeed, about 'fairness' in general, it is time to keep a sharp eye on your wallet, for it is about to be picked."
Another charge claims that Japanese or other foreign firms can afford to engage in dumping because their governments are willing to subsidize their losses. But again, we should still welcome such an absurd policy. If the Japanese government is really willing to waste scarce resources subsidizing American purchases of Sonys, so much the better! Their policy would be just as self-defeating as if the losses were private.
There is yet another problem with the charge of "dumping," even when it is made by economists or other alleged "experts" sitting on impartial tariff commissions and government bureaus. There is no way whatever that outside observers, be they economists, businessmen, or other experts, can decide what some other firm's "costs" may be. "Costs" are not objective entities that can be gauged or measured. Costs are subjective to the businessman himself, and they vary continually, depending on the businessman's time horizon or the stage of production or selling process he happens to be dealing with at any given time.
Suppose, for example, a fruit dealer has purchased a case of pears for $20, amounting to $1 a pound. He hopes and expects to sell those pears for $1.50 a pound. But something has happened to the pear market, and he finds it impossible to sell most of the pears at anything near that price. In fact, he finds that he must sell the pears at whatever price he can get before they become overripe. Suppose he finds that he can only sell his stock of pears at 70 cents a pound. The outside observer might say that the fruit dealer has, perhaps "unfairly," sold his pears "below costs," figuring that the dealer's costs were $1 a pound.

"Infant" Industries

Another protectionist fallacy held that the government should provide a temporary protective tariff to aid, or to bring into being, an "infant industry." Then, when the industry was well-established, the government would and should remove the tariff and toss the now "mature" industry into the competitive swim.
The theory is fallacious, and the policy has proved disastrous in practice. For there is no more need for government to protect a new, young, industry from foreign competition than there is to protect it from domestic competition.
In the last few decades, the "infant" plastics, television, and computer industries made out very well without such protection. Any government subsidizing of a new industry will funnel too many resources into that industry as compared to older firms, and will also inaugurate distortions that may persist and render the firm or industry permanently inefficient and vulnerable to competition. As a result, "infant-industry" tariffs have tended to become permanent, regardless of the "maturity" of the industry. The proponents were carried away by a misleading biological analogy to "infants" who need adult care. But a business firm is not a person, young or old.

Older Industries

"The balance of payments, as we said earlier, is a pseudoproblem created by the existence of customs statistics."
Indeed, in recent years, older industries that are notoriously inefficient have been using what might be called a "senile-industry" argument for protectionism. Steel, auto, and other outcompeted industries have been complaining that they "need a breathing space" to retool and become competitive with foreign rivals, and that this breather could be provided by several years of tariffs or import quotas. This argument is just as full of holes as the hoary infant-industry approach, except that it will be even more difficult to figure out when the "senile" industry will have become magically rejuvenated. In fact, the steel industry has been inefficient ever since its inception, and its chronological age seems to make no difference. The first protectionist movement in the United States was launched in 1820, headed by the Pennsylvania iron (later iron-and-steel) industry, artificially force-fed by the War of 1812 and already in grave danger from far more efficient foreign competitors.

The Nonproblem of the Balance of Payments

A final set of arguments, or rather alarms, center on the mysteries of the balance of payments. Protectionists focus on the horrors of imports being greater than exports, implying that if market forces continued unchecked, Americans might wind up buying everything from abroad, while selling foreigners nothing, so that American consumers will have engorged themselves to the permanent ruin of American business firms. But if the exports really fell to somewhere near zero, where in the world would Americans still find the money to purchase foreign products? The balance of payments, as we said earlier, is a pseudoproblem created by the existence of customs statistics.
During the day of the gold standard, a deficit in the national balance of payments was a problem, but only because of the nature of the fractional-reserve banking system. If US banks, spurred on by the Fed or previous forms of central banks, inflated money and credit, the American inflation would lead to higher prices in the United States, and this would discourage exports and encourage imports. The resulting deficit had to be paid for in some way, and during the gold-standard era this meant being paid for in gold, the international money. So as bank credit expanded, gold began to flow out of the country, which put the fractional-reserve banks in even shakier shape. To meet the threat to their solvency posed by the gold outflow, the banks eventually were forced to contract credit, precipitating a recession and reversing the balance-of-payment deficits, thus bringing gold back into the country.
But now, in the fiat-money era, balance-of-payments deficits are truly meaningless. For gold is no longer a "balancing item." In effect, there is no deficit in the balance of payments. It is true that in the last few years, imports have been greater than exports by $150 billion or so per year. But no gold flowed out of the country. Neither did dollars "leak" out. The alleged "deficit" was paid for by foreigners investing the equivalent amount of money in American dollars: in real estate, capital goods, US securities, and bank accounts.
In effect, in the last couple of years, foreigners have been investing enough of their own funds in dollars to keep the dollar high, enabling us to purchase cheap imports. Instead of worrying and complaining about this development, we should rejoice that foreign investors are willing to finance our cheap imports. The only problem is that this bonanza is already coming to an end, with the dollar becoming cheaper and exports more expensive.
We conclude that the sheaf of protectionist arguments, many plausible at first glance, are really a tissue of egregious fallacies. They betray a complete ignorance of the most basic economic analysis. Indeed, some of the arguments are almost embarrassing replicas of the most ridiculous claims of 17th-century mercantilism: for example, that it is somehow a calamitous problem that the United States has a balance-of-trade deficit, not overall, but merely with one specific country, e.g., Japan.
Must we even relearn the rebuttals of the more sophisticated mercantilists of the 18th century — namely, that balances with individual countries will cancel each other out, and therefore that we should only concern ourselves with the overall balance? (Let alone realize that the overall balance is no problem either.) But we need not reread the economic literature to realize that the impetus for protectionism comes not from preposterous theories, but from the quest for coerced special privilege and restraint of trade at the expense of efficient competitors and consumers.
In the host of special interests using the political process to repress and loot the rest of us, the protectionists are among the most venerable. It is high time that we get them, once and for all, off our backs, and treat them with the righteous indignation they so richly deserve.